The USDA released its September crop report on Wednesday and confirmed big corn and bean yields. The surprise was their larger than normal average corn yield of 181.3 bpa which is record breaking in many states. The market did not expect this big of an increase over the 178.4 bpa yield which was reported in the August report. This 240 M bu increase in production now puts total corn production at a whopping 14.827 M bu. With this increase, the USDA also increased feed demand by 50 M bu and exports by 50 M bu as well. When the dust settled, corn carryout for 18/19 was increased by 90 M bu from 1.684 M bu last month to 1.774 M bu this month. Record ear counts and ear weights led to the 240 M bu production increase on Wednesday. At the market close, corn traded down 14 to 15 cents.

The market simply did not expect this increase in corn production and it was a shocker to many traders. The relatively tight 18/19 corn carryout around 1.5 M bu was the single remaining supportive item left that any bull could hang his hat on as there is nothing bullish about anything in the bean market. With Wednesday’s increase in corn production, this hope that the corn market’s strength might help offset the bean weakness all but instantly vanished. A 1.5 B bu corn carryout is bullish but a 1.8 B bu corn carryout is not. Once the carryout approaches 2.0 B bu, the market gets in comfort mode and a comfortable market does not rally. This change will allow the basis, futures, and the spreads to trade weaker in the coming days, and will likely push the trading range of Dec ’18 corn lower in coming days. Previously, I believed the $3.50 area would hold on Dec ’18 corn futures at Chicago. After this increase, the $3.50 level will likely not hold and new lows will be made, most likely down to the $3.25 – $3.30 level.

On beans, the situation was not as bearish as the market believed it would be. We have been talking about huge yields and massive bean carryouts for some time. The USDA did raise the bean yield and pegged it at 52.8 bpa up 1.2 bpa from August. This is the 5th year in a row where the USDA raised the bean yield from Aug to Sep. Rains during last half of August have really helped to fill the bean pods and there are many areas of the Corn Belt where bean yield potential is just huge. The crop is lush and improved genetics are proving beneficial. Wednesday’s increase in bean yield raised total bean production by 107 M bu up to 4.693 B bu. With these numbers, there are 8 states which made new records on yield. When the dust settled, bean carryout was increased by 60 M bu up to 845 M bu.

Big crops generally get bigger, and I would not be surprised if in future months that the national average bean yield will end up over 53 bpa. If this happens, the bean carryout will approach a staggering 1 B bu level that this country has never seen before. Obviously, our inability to get the trade dispute reconciled with China on buying our beans will only allow the beans to stack up faster and faster in the interior. If the bean yield continues to grow and we are not able to put a deal together with China by this harvest’s end, which seems less likely each day that we move forward, then the prospects of any rally in Nov ’18 bean futures goes down the drain. Nov ’18 bean futures at Chicago made a new contract low just before the report and eventually traded down to $8.21 at Chicago. With the above increases in yield, no progress on a China deal, I see no way that this $8.21 level will hold. I believe that new lows in Nov bean futures will be made, and the market will likely test the $7.75 level during gut slot. This will be especially true if we get any bean carryout number halfway close to 1.0 B bu for this year. If this happens, Nov ’18 bean futures will be pressed lower big time.

This massive bean production is causing futures, basis, and spreads to be weak and look to get even weaker. The basis at the Gulf is now trading negative numbers which is some of the weakest basis levels we have seen in over 30 years. The normal bean basis at the gulf is usually +75 cents over the November bean futures as traded in Chicago. Today, it is trading at 5 cents UNDER Nov futures, which is 80 cents less than normal. This explains why our local basis is so weak today. This is what happens when you take our biggest bean buyer (China) out of the picture. The market’s role is to discount beans cheap enough to find new demand. We now have a bean market that is cheap enough in the US and has pushed the bean market high enough in Brazil, as the Chinese are sucking them dry of all their beans, that we have a market difference in price that totally covers the 25% tariff.

Now, the real question is whether the cash strapped Chinese bean crusher will actually buy US beans because they are cheaper even with the 25% tariff price increase in beans. There will be huge political pressure for the Chinese crusher not to buy US beans no matter if the total price is cheaper or not. Economics don’t matter here. You do not buy US beans no matter the cost! Besides, we have a trade war going on, and what team are you on! The result is that the ports at the pacific northwest in Oregon and Washington State are desolate with very little beans being loaded out as this is where the Chinese primarily pull US beans out of the country. Nothing about this bean scenario is good for our farmers or our bean market. How we handle this new dynamic will be very interesting in the next 8 weeks. We will likely see things occur that we have never witnessed before.

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What Are The Charts Telling Us?

Here are the support and resistance levels for cash and new crop grains. These are all futures levels as traded at Chicago: